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What is a Deed of Trust?

Patrick Austin, J.D. | September 27, 2024

Patrick Austin
Attorney from George Mason
Patrick Austin, JD

Patrick Austin is a licensed attorney with a background in data privacy and information security law. Patrick received his law degree at George Mason University's Antonin Scalia Law School, where he served as the Editor-in-Chief for the National Security Law Journal.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: A deed of trust is a method of securing a real estate transaction that includes three parties: a lender, a borrower and an independent third-party trustee. The lender gives the borrower the money to buy the home in exchange for one or more promissory notes, while the trustee holds the legal title to the property until the loan is paid off. Some states use this method instead of the traditional mortgage process.

Fun fact: not all home loans involve a traditional mortgage. Many people are surprised when they discover a similar legal document can be used to facilitate the purchase of real estate, in certain states. This legal document is known as a Deed of Trust. It basically serves the same purpose as a mortgage, but with notable distinctions. If you are curious about using a Deed of Trust to complete a real estate transaction, or you are looking for the rules and regulations governing these types of deeds, then keep reading.

A Deed of Trust, legally speaking, is an agreement between three parties: a borrower, a lender and a Trustee. The deed is used to help facilitate real estate transactions where money needs to be borrowed in order to complete the purchase of certain property. A Deed of Trust, as mentioned, shares many similarities to a mortgage. In fact, a number of states use them instead of traditional mortgage documents.

What is a Deed of Trust on a property?

A Deed of Trust guarantees a real estate transaction, such as the purchase of a home, between a lender and a borrower. The lender gives money to a borrower for the home purchase. In exchange, the lender receives a promissory note guaranteeing the borrower will repay the amount loaned. A Trustee will hold the title to the property during the period of the loan.

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Not all states recognize the Deed of Trust

It is important to note that Deeds of Trust are not universally recognized. A limited number of states continue to recognize the use of such deeds in the financing of a real estate purchase. Those states include:

  • Alaska
  • Arizona
  • California
  • Colorado
  • Idaho
  • Illinois
  • Mississippi
  • Missouri
  • Montana
  • North Carolina
  • Tennessee
  • Texas
  • Virginia
  • West Virginia

Some states, including Kentucky, Maryland, and South Dakota recognize the use of both mortgages and Deeds of Trust.

Let’s take a look at how a deed of trust works in Texas.

Tom wants to purchase a home in Austin County, Texas and goes to his good friend Jerry for a loan. Jerry, flush with cash from the Cheese Factory, agrees to lend Tom the money in exchange for a promissory note linked to a trust deed. This would make Tom the borrower and Jerry the lender. The trust deed would transfer legal title to the property to a trustee, which is usually a title company, escrow company, or bank. In this example, let’s say Tom and Jerry go to Acme Bank, which agrees to be the trustee. Acme Bank would hold the trust deed as collateral for the promissory note.

What are the contents of a Deed of Trust?

The information contained in a Deed of Trust is similar to the type of information contained in a mortgage document. This information typically includes:

  • Full legal names of the borrower, lender, and Trustee
  • Description of the property to be placed in trust
  • Specific terms of the loan, such as the principal amount, monthly payments, and interest rate
  • Specific terms related to late fees and penalties in the event the borrower fails to make timely payments
  • Specific restrictions or requirements on the use of the property while it is in trust

In addition, a Deed of Trust will probably include a Power of Sale Clause providing the Trustee the legal right to sell the property if the borrower goes into default.

What is the difference between a deed of trust and a mortgage?

As mentioned, there are many similarities between a deed of trust and a mortgage. However, there are also notable differences. For example, while both documents can be used to guarantee that a borrower will repay a loan, mortgages typically only involve two parties - the lender and the borrower. In contrast, a deed of trust will typically involve three parties - the lender, the borrower, and the Trustee.

One of the most significant differences between a deed of trust and a mortgage is how defaults on payments can be handled. With a traditional mortgage, the lender is tasked with initiating foreclosure in the event a borrower fails to make the promised payments on their home loan. The mortgage foreclosure process is handled in a court of law. In contrast, in the event of a default on payments, a deed of trust will go through a process known as nonjudicial foreclosure (more on this below).

Other differences between a deed of trust and a mortgage include:

  • Mortgages are recognized in all 50 states
  • Deeds of Trust are only authorized in a limited number of states
  • Mortgages offer both the borrower and the lender equal interest in the property until the loan is paid off
  • Deeds of Trust transfer legal title of the property to the Trustee

What is the difference between a deed of trust and a promissory note?

A deed of trust and a promissory note share similarities, but they are distinct documents. A promissory note is a legal document that basically serves as a “promise” by the borrower that they will pay the loan back. In real estate transactions, promissory notes are signed by the borrower, and they contain the details and terms of the loan, such as payment schedules, interest rates and payment obligations.

What happens when a deed of trust is paid off?

Similar to a mortgage, once a deed of trust is paid in full, the borrower will then own the property outright. Each deed of trust has a maturity date stipulating when the loan will be paid off in full. As long as the borrower makes scheduled payments, in accordance with the agreement, the loan will be considered repaid and the borrower will be the legal owner who holds the title.

What is the Trustee’s role when a deed of trust is used to secure property for a loan?

The role of the Trustee is simply to hold the legal title on the property for the duration of the The Trustee must remain impartial and not do anything to benefit either the lender or the borrower.

It is important to note that some states have laws on the books that restrict who can serve as a Trustee in a deed of trust. In these states, the Trustee must be a bank, credit union, thrift, title insurance company, attorney, or other company specifically authorized to hold a trust. For example, Colorado has a public trustee designated in each county to help facilitate transactions using a deed of trust. In other states, anyone can serve as a Trustee.

What type of foreclosure is commonly used when a deed of trust is the security instrument?

As mentioned earlier, in the event the borrower defaults on their scheduled payments, a non-judicial foreclosure will be initiated. A non-judicial foreclosure, as the name implies, takes place with the oversight of a court. The parameters for a non-judicial foreclosure are typically set forth in the trust deed’s terms and in accordance with state law. If the borrower is unable to make the loan current, the property will be put up for auction through a Trustee's sale.

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In summary

A deed of trust is a legal document that can be used in specific states to facilitate the purchase of property (e.g., your home, a rental property, etc.). While a Deed of Trust is similar to a mortgage, there are important differences and these differences could significantly affect a borrower if they encounter financial hardship at a later point in time. This is especially true when it comes to the foreclosure process.

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